Exposure rates of the Dorval Asset Management Range – 19th February 2021

The speedy surge in US rates is the downside of the expected economic boom, while very solid corporate earnings for 4Q 2020 represent the positive flipside – posting very strong showings at a time when the world economy still remained far removed from its usual pace of growth.

The hefty weighting of digital and healthcare sectors pushed EPS for the S&P 500 back above pre-crisis figures as early as 4Q 2020, moving up 2% vs. an 11% plunge expected by analysts just a few weeks ago (cf. chart 1). This uptick is particularly remarkable when we set it against last year’s depressed economic environment, even if a strong economic recovery emerged since the second quarter. The US economy is still trending below its potential pace, so scope for earnings growth remains very strong for 2021 despite some costs mounting, such as commodities and sea freight. The S&P analysts’ consensus expects a fresh 13% upturn in EPS between 4Q 2020 and 4Q 2021.


An impressive V-shaped recovery in earnings per share on Wall Street
Earnings per share for the S&P 500 (Goldman Sachs estimate for 4Q 2020)

Analysts’ consensus projections for 4Q 2021


This potential has materialized in the very robust surge in retail sales in the United States in January (cf. chart 2), translating the effects of stimulus packages. US individuals received a $600 stimulus check, while unemployment benefits have increased following the bipartisan agreement approved in December 2020. Households and businesses will obtain further aid once the Biden relief package is agreed, which is mostly likely set to be before mid-March. Decisions from Congress are likely to slim down the plan from $1.9trn to perhaps $1.4trn, equating to 6.7% of GDP, which will still be more than sufficient for an economy that will also benefit as the virus is gradually brought under control.


Stimulus checks for individuals and a rebalancing of consumer spending into goods send retail sales soaring in the US

US retail sales


Corporate America continues to take center stage internationally from a profits standpoint, but the earnings reporting season has also been a source of some pleasant surprises elsewhere, particularly for European small-caps for example. There are admittedly not enough quarterly data in Europe to produce the same stats as for Wall Street, but we can assume that analysts’ earnings projection trends for the next 12 months closely follow guidance issued by companies in their announcements. According to the Bloomberg consensus, projections have recovered considerably to revisit year-earlier figures, while the same cannot yet be said for large-cap indices (cf. chart 3). Small-cap indices seem to combine growth sectors – including tech – and cyclical sectors that gain from the expected economic recovery in a more balanced way as compared with large-cap indices.


Small-caps seem to have quickly taken the lead on profits in Europe
Forward EPS for MSCI small-cap vs. large-cap indices in the euro area (source: Bloomberg)

Base 100 in January 2020
Large-caps / Small-caps


Despite recent market volatility fueled by the quickening upsurge in US long-term rates, we continue to lock in the recovery in corporate profits via themes resolutely connected to the economic cycle, stimulus packages (including green deals) and the prospects of the economy reopening. We steer risk in our flexible portfolios by seeking out strong diversification and adapting our exposure rates to the market. Our bond duration remains extremely low.



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